What is Negative Car Equity?
What is negative car equity?
Negative car equity occurs when you owe more on your car loan than the vehicle is actually worth. This is also known as being "upside down" on your car loan. It can happen when a car's value depreciates faster than the loan balance decreases, which is common with new cars that lose value quickly once they're driven off the lot. Negative equity can make it tricky to sell or trade in your car, as the sale might not cover what you still owe, leaving you to pay the difference.
3 things to know about negative car equity
- One common cause of negative car to equity is a long-term loan, such as those extending over five years. These loans often have lower monthly payments, but they also mean that the balance is paid down more slowly, increasing the risk of negative equity.
- Negative car equity can also result from a large initial loan amount, perhaps due to rolling over an existing loan from a previous vehicle into a new car loan. This increases the overall loan amount, potentially surpassing the car's value from the start.
- If you're in a situation with negative car equity, one strategy to consider is making extra payments to reduce the principal balance faster. This can help you reach a point where you owe less than the car's value more quickly and avoid complications if you decide to sell or trade in the vehicle.
Source: https://consumer.ftc.gov/articles/auto-trade-ins-and-negative-equity-when-you-owe-more-your-car-worth
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